INTRODUCTION

Immediately before Slovenia introduced its new currency in October 1991, the country faced huge internal and external disequilibrium as well as complete monetary disorder. Inflation was running about 20% per month, while production was plummeting 12% per year. The collapse of the Yugoslav market cut total sales by over 15%, while political risks blocked access to foreign credits. Hence, before “standard” steps toward transition to a private market economy could be taken, macroeconomic stabilization measures were badly needed to stop runaway inflation and mitigate effects of the collapse of Slovenian markets.

Macroeconomic stabilization is usually given the highest priority in the context of sequencing considerations (see Fischer and Gelb 1990). In the case of Slovenia, the paramount role of price stabilization was reinforced by the fact that creation of a new currency was the very process of establishing the credibility of a new state. Nevertheless, price stabilization was only one of two basic objectives of the monetary reform and foreign exchange–regime changes adopted in October 1991.

After the Yugoslav market fell apart, the Slovenian economy became highly open. Its foreign trade ratio climbed over 1.15, and imports of raw material alone exceeded 25% of GDP! In September 1991, with foreign exchange reserves (net of short-term debt) for only four days of imports, production was on the brink of collapse.